Liu Yongming

Coal chemical industry has been the market focus since the beginning of 2021 as a result of continuously rising coal prices. The whole industrial chain saw the prevalence of price rises of products and shortage of supply under production pressure. This resulted in irrational speculations and pursuit of higher prices, which caused many hidden troubles for the industry.

As the National Development and Reform Commission and other departments deployed initiatives to clean up and rectify the coal storage sites in coal producing areas, the regional governments in Shanxi, Inner Mongolia and Shaanxi took specific rectification actions immediately in early November 2021. As a result, the coal prices began to fall and the ripple effect along the industrial chain was looming. In the context, it is believed that the coal chemical industry chain is cooling down rationally. This, combined with the operation status of upstream, middle and downstream segments, the industry is more likely to go into a consolidation.

Easing upstream supply

With the government’s regulatory tightening in the coal market, the prices of both domestic and imported coal have decreased significantly since late October 2021. This, combined with an increase in the coal production in the near term, will further improve the supply and demand balance of the coal market. On November 10, the National Development and Reform Commission reported that the daily schedulable output of coal reached a record high of 12.05 million tons across the country, up by 120 000 tons from the previous peak. The coal output in Shanxi, Shaanxi and Xinjiang reached a new high of the recent years, laying a more solid foundation for the nationwide supply of stably-priced energy. 

The supply of coal feedstock start firming and hence the coal prices fell back after reaching a peak. Power coal (5 500 kcal) even rose to over RMB1 800 (per ton, the same below) at the end of October, and fell back to around RMB900 on November 28, a decrease of nearly 100%, which helped to cool down the overheated coal chemical industry.

Costs yet to be covered

Domestic coal chemical enterprises said that their production costs increased because of the sharply increased coal prices. At the same time, they were unable to lift operating rates effectively due to a dual control system of total energy consumption and energy intensity as well as power restrictions imposed by the government. Thus, the comprehensive costs rose and producers were forced to raise offers. For example, power coal prices increased by 350% from the beginning of 2021 to October, coking coal prices increased by 192%, and downstream products such as coke, methanol and coal tar increased by 95%, 100% and 90% respectively. However, these price rises did not outpace the increase of upstream prices, leaving coal chemical producers with limited margin room in the seemingly profiteering industry.

When the prices of raw coal fell due to easing supply, the cost of coal chemical began to be reduced, which was conducive to the healthy development of the industry and the rational recovery of the market.

A correction mode in downstream market

The weakened coal market sent many derivatives on a correction mode. Prices of coke, maleic anhydride, crude benzene, medium-temperature coal tar, ammonium sulfate and industrial naphthalene decreased by 22.4%, 17%, 14%, 10.4%, 9% and 3% respectively over half a month up to November 26, 2021. Prices of high-temperature coal tar and coal asphalt also retreated, but did not show significant decreases. In the context, downstream producers largely adopted wait-and-see attitude and hence a new balance between supply and demand is expected to take shape. The speculations are cooling down, and a rational correction is on its way. Prices of some overpriced products may plunge if the trade volume is not as big as before.

The current operating rates in the industry, the difficulty in transportation in northern areas with the upcoming cold snap and the continuous epidemic are exerting pressure on the coal chemical industry, and hence the industrial chain is weakening. However, given that the upstream market will not increase significantly in the short term and the operating rates of coal chemical producers will not rise greatly, it is unlikely that the coal chemical industry will retreat obviously. The prices are expected to remain high in the short term and will go into a narrow consolidation later.